OK, just in time, my performance analysis got a bit more sophisticated. It now includes dividends, and is calculated on a weightedaverage gain basis, so now the impact of larger & smaller portfolio stakes is recognized. I think I’ve tracked any increase/decrease in portfolio holdings pretty well during the year, via Twitter (so plse sign up as a follower!) & blog comments. [No point in having interested readers if I don’t post such relevant info on a timely basis]. This allowed me to calculate an average portfolio stake for each holding, which I think is the best metric to use.

I did, however, stick with my original yr-end 2011 or 2012 write-up prices as a cost base – I didn’t want to drive myself crazy calculating average net purchase prices! However, I know I’ve subsequently added to portfolio holdings at higher & lower prices, so I think that pretty much cancels itself out. It also means I’ve omitted partialprofits harvested on certain holdings, so my total return may be marginally understated.

Overall, eyeballing my respective analyses, dividends & portfolio weightings have in total (on a pretty even split) added about 2-3% to my annual return. The pretty low contribution from dividends may surprise you, but don’t forget I’m none too enamoured with them… See here,here&here. As far as I’m concerned, if you’re impressed enough with a stock’s valuation & prospects to actually buy it, surely you’d prefer to see it compound its earnings?!Only a third of my holdings pay a dividend.

OK, we should let the figures do the talking now. Please note any holding marked thus** has been completely sold off. And if anybody thinks I’m moving the goalposts here (vs. previously measuring performance via a simple average gain, exc. dividends), I include a complete Excel analysis file below for your perusal. [It also includes each holding’s website link, for reference]:

Looking at individual stocks, the winnersreally speak for themselves. There was no real game-changing/unexpected news involved (except for Avangardco at yr-end, which was completely ignored!), they simply made steady progress. In fact, considering the time-scale, most of the gains obviously arose from a (partial) closing of the valuation gap(s) I’d identified in my write-ups. Winning portfolio investment themes for the year were Irish & UK small/mid caps, alternative assets & frontier markets. It’s probably far more instructive to focus on my losers:

– Petroneft Resources & Richland Resources: At least I got my weightings right, these were my smallest portfolio holdings for the year. The real mistake was perhaps buying them in the first place! I still believe they offer far higher (measurable) intrinsic value, but it’s not clear that really matters… You can do all the value analysis you want, but investment success/failure’s probably going to be dictated solely by unpredictable news-flow, and the misfiring synapses of the resource stock tribe. This is really not investing, and it’s not fun money either…

– Cresud (& Richland Resources): One can mostly ignore politics. But occasionally a tipping point is reached, and value goes out the window. Companies suffering from too much politics (or debt) always seem cheap, and then get cheaper! Fortunately, I recognized this with Argentina, and exited Cresud with only a small loss. I haven’t yet decided with Richland – in a somewhat similar fashion, Tanzanian government neglect has now evolved into more active interference. But in this case, perhaps offering the government some (bigger) slice of the pie might ultimately yield a significantly better net benefit for shareholders..?

– JPMorgan Russian Securities: Country funds don’t lend themselves so well to value analysis. The best you can do is look for a cheap market P/E, and check the economic backdrop is neutral to positive. Focusing on fund discounts might actually be more rewarding – wide discount(s) may be the best signal a market’s cheap. My two Russia buys illustrate this – I actually turned a small profit on Renaissance Russia Infrastructure, vs. a 13% loss on JRS, mainly because I bought it on a far larger discount.

Timing/buying country funds is tough – after a purchase, the market invariably mocks you by promptly declining! The best solution is to average in to your stake over time. Most Russian funds (investing in listed stocks) trade around a 10-12% NAV discount in the past year, or so – ideally, I’d like to see a 20%+ discount, but Russia now trades on something like a 5.5 P/E, so beggars can’t be bloody choosers! I recently added to my JRS stake.

It’s difficult to identify how much luck’s involved, but overall I think I’ve done a much better job of avoiding/limiting mistakes in recent years. There are two simple reasons why: First, I’m far more disciplined about limiting the number & (more importantly) the size of speculative stocks in my portfolio. Second, I’m (usually!) no longer seduced by high debt & poor/negative cash-flow stocks. I really can’t stress this enough, I think this category of stocks is surely the biggest source of mistakes & losses for all investors.

If you’re a growth investor, the hype & potentialthat’s often attached to these kind of stocks may well suck you in. Equally, if you’re a value investor, the resulting cheapness of these stocks can also sucker you. Of course, what then happens is these stocks keep getting cheaper, or they go belly-up, or they survive but any eventual value/earnings benefit’s been diluted away… Steer clear! OK, let’s compare:

The 2012 Average Index performance was +11.7%, so I’m v pleased to see the portfolios out-perform by 8.5% & 9.3%, respectively, for the year!

Of course, this is usually where I sigh, and wonder why I wasn’t fully invested for the year in just Irish stocks, and/or UK small-cap stocks (the FTSE Small Cap Index was up +24.9%). Thankfully, after a minute or two, I cop on & give myself a shake – that’s a rainbow I never really want to chase! But I think this highlights a number of problems investors tend to trip over:

– Home bias: Perhaps the most dangerous… Yes, I’m a huge cheerleader for buying Irish stocks – but all in moderation, please! To end up voluntarily ‘trapped’ in your home market (no matter how large, US readers!) seems a bit like voting for a holiday in hell. Sure, you may end up the biggest fish & the best stock-picker, but you still run the risk of getting crucifiedfor God knows how long. For example, if you were a fresh buyer of Irish stocks last year, I’m sure you felt v happy with the value & returns on offer! But spare a thought for the devoted Irish investor – a 17% return in 2012 doesn’t much offset the pain of enduring what is still a 67% loss from the market’s high…

– Calendar year bias: It’s 2000 & bloody 13! Why are we all still so obsessed with the calendar? I’m already sick of diet & exercise ads on TV – who on earth decided the depths of winter are the best time for an overdose of no food & far too much exercise?! To be followed by an orgy of romance in February? In the same way, we fall in love with i) our/other people’s performance at the end of the year, and ii) a fresh batch of stock picks for the new year. Bit of a mug’s game, really.

First, you need proper context – for example, the 2012 UK small-cap rally isn’t so gratifying when you note it’s mostly a recovery from a 20% decline in H2 2011. Second, a new year should be pretty irrelevant. Why would you have new stock picks simply because it’s January? If you liked a stock in December, shouldn’t you still like it, or even think about buying more? And if you no longer liked a stock, shouldn’t you have sold it already?! Finally, a single year of performance means next to nothing – long-term performance is all that ultimately matters, for yourself & for anybody who wants to judge the merits of your performance.

– Chasing performance/lack of diversification: Trying to home in on the best markets/sectors each year is just fool’s gold anyway. If you can do it, I salute you – you’re a far better investor than I, and I’m keen to come visit your private beach. But I just can’t do it – like most of us, I suspect. And if I tried, I’d probably fall into the usual trap of buying into the latest hype far too late. This kind of performance chasing & lack of diversification is almost guaranteed to yield inferior returns – even if you can match the longer term return of a more diversified portfolio, you’ll still suffer far more painful levels of volatility.

Now, I’m not suggesting you drearily fill your portfolio with benchmark weightings for everything – not at all! I think it’s entirely possible to assemble a diversified portfolio from a nice (but limited) selection of cheap and interesting assets & markets from around the world. This will allow you to sleep far easier, and I’m convinced it will deliver far better long-term returns in most instances.

– Relative performance: In the end, relative performance is pretty meaningless. Let’s say everybody & the indices are down for the year, while you lose money but out-perform. Are you happy? Maybe in fund management la-la-land you are…but in the real world, of course you’re fucking not! And if everything comes up roses, is it relevant if you’re a little ahead/behind the indices? I say no!Your performance will mostly depend on how long & hard you worked (more so), how smart you were (less so), your attitude to risk & risk management, and (most importantly) how well you controlled your fear & greed. As long as you’re already pretty honest & self-critical in your investing, examining your performance against regular indices probably won’t be too rewarding or revealing.

Quite honestly, the only benchmark I feel has any true relevance (for me) is hedge fund performance. All genuinehedge funds (and there’s less & less of them, it seems) care about is absolute performance. If that means buying bonds, moving to cash, going short, abandoning your home market, buying unusual, uncorrelated or even negatively correlated assets, whatever – well, ideally, that’s exactly what they’ll do. I don’t have all the sophistication/tools a hedge fund might employ, but I think it’s absolutely correct to hold myself to the same high standard. After all, who am I really trying to impress here? Yes, in the end – it’s myself & my wallet.

I confess, it would actually be a great comfort to just stick with cozy & familiar sectors/markets/assets, but I know that seeking out absolute performance with a truly diversified portfolio is a far more demanding, but far superior, investment objective. Of course, diving into things you know nothing about is a far worse alternative – hence, the never-ending demand for more education & research. As I’ve said before, you need to always read, read, read!

But I have to admit, it’s also proved to be a really nice benchmark for comparison this year. 😉 Depending on which index you consult, it looks like hedge funds will wrap up the year with a +3% to a +8%gain. That’s pretty satisfying – my portfolio return was a multipleof their performance…and I don’t even get paid anything like 2 & 20! Best of luck in the New Year, readers!

I can answer in general, bt not positively: I don’t spend much time looking at green stocks – mostly, I don’t think I’m missing out. They’re usually small-cap, over-priced, under-funded/cashflow negative, and their governance & accounting can sometimes leave a lot to be desired. Any co’s/industry that directly, or indirectly, depend on subsidization from developed market governments isn’t for me. There’s probably plenty of sub-cash valuations these days – interesting in theory, but in reality most management teams will be hell-bent on pissing the cash away, rather than handing it back to shareholders. This list seems to be mostly an attempt at bottom-picking. I don’t like the number of Canadian stocks – always wary of Toronto listings. I think WM & ACCEL are the only two companies that stand out to me – but I don’t think of either of them as being particularly green, or cheap.

Personally, I don’t believe in most of green/alternative energy industry myself – I just consume far less 😉 All I really need is plenty of books, music, and dinners/drinks with family & friends – who cares what the Jones are doing. And why even enter a shop unless you need to actually buy something?! Now multiply that across the nations… Maybe it wouldn’t suit us so much as investors, but we’d certainly be sitting a lot prettier in terms of energy/resources!

Yes. It is true that they are small caps, over-priced, underfunded/cashflow negative, I noticed that with some companies in my portfolio, normal ratios just break down as if they are generally should not exist. (Greatly exaggerated of course). But it is because of their small cap, there are potential growth. I already reconsidered some companies and might consider reviewing just as restricting to profitable companies.

i am impressed by your sincerity. but the true litmus test will be the test of time. Have you done this exercise in the past years ? I’d like to follow your performance back in time over a longer period.
Warren Buffet exceeded his personal of +15% p.a. over …decades !
If you are another WB-in-the-making, I’d like to know it early !!

Seriously, keep up your good work, i enjoy all of your posts.

My personal score for 2012 was better than yours, but it was a “dirty” success, as my portfolio is very unbalanced. Your methodology convinces me more than my own.

Thanks – I’ve done this exercise for many years, and v happy about it 😉 But that history isn’t v relevant to the blog, and obviously cdn’t be verified by readers. But everything here, though, is written ‘real-time’ & can be easily verified.

Yes, I go to great pains to ensure my portfolio is (hopefully) well diversified. Therefore, I’d always expect some investors to significantly out-perform my portfolio each year – perhaps because they’ve got a far more concentrated and/or non-diversified portfolio, that just happens to be in the right place/right time. Of course, sometimes it’s simply because they’re a much better stock picker! In which case, I sit up & pay close attention.

Honestly, you’d need at least a 10 yr+ record to have any idea from the numbers if an investor really has a sustainable edge…or just got lucky. Most of the time, you’ll have to rely on an evaluation of their investment process & style, not their actual returns, to try determine if they might be a superior investor. Unfortunately, with too many fund managers, you don’t have enough info or transparency to make that judgement. I think that might ultimately be the most compelling attraction that a new generation of investor bloggers offers – finally, there’s a chance to get that kind of insight…

I didn’t check that, but sounds abt right – the balance is a mix of some cash, (interesting) fixed income, event-driven investments & some other undisclosed holdings. Generally, I don’t really believe in holding cash – if I run low on ideas, or get a little nervous abt the market, I prefer to just up my interest/investment level in event-driven type opportunities.

Re Robert’s point, there’s going to be unrepresented cash drag on the portfolio’s performance vs. performance numbers for the indices that are fully invested throughout the year.

Holding a degree of cash at all times is not going to be controversial, but always worth considering how it impacts reported returns.

Additional issue is that you’ve compared total return measures (capital gain plus yield) on your portfolio versus indices that don’t include the dividends. S&P 500 Total Return (SPTR on Bloomberg) was up ~16.0% for 2012, higher than the S&P 500 (SPX on Bloomberg) which you’ve reported as being up 13.4%.

In a number of non-US markets, the incremental return from yield is even more material cf. Canada, Australia

People tend to generally track & focus on the regular price indices, so that’s what I’ve used as benchmarks here. Dividends for me are generally accidental (I don’t buy stocks specifically for dividends), so the number of dividend stocks I hold & the effective dividend yield of my entire portfolio’s quite low. Good pt you raise, anyway – but if I switched to total return indices, and included the partial realization profits I omitted from my analysis above, I suspect I’d still arrive at much the same level of out-performance.

The balance of my portfolio is (invariably) not held in cash, and I’m delighted the return on my total portfolio was significantly in excess of the returns above. A good portion of this obviously comes from returns on my undisclosed holdings, but it’s worth highlighting currency made a positive contribution also. A lot of people don’t focus on this, but I think it’s important for every investor to have a deliberate & diversified currency allocation within their portfolio.

ps have you looked at raven russia? it has some themes you like: cheap stock, russian RE geared to economic growth (mainly distribution facilities), seasoned UK managers with good track record; for catalyst — they tender for part of the float twice a year

Yeah, I like Raven Russia, and Bilton & Hirsch have always seemed like good operators. My only complaint: I wish RUS was a little cheaper (although there’s clearly some upside NAV potential).

I already hv some (indirect) Russian property exposure. Might be an attractive sell at some point, so I expect to take a closer look at the whole sector soon. RUS is obviously a good candidate, but I’ll be comparing them to another co I already hv in mind – in fact, it reminds me of RUS: Good management team/record/governance, but with lower leverage & a cheaper value.